Germany is charting a path of larger-than-expected deficits through 2029, driven by higher budget spending and looser fiscal rules — a shift that, according to Goldman Sachs Research, is likely to accelerate economic growth in the near term.
The German cabinet approved its second draft of the 2025 federal budget in late June, alongside a medium-term fiscal framework stretching to 2029. Economists at Goldman Sachs say the country is tapping into newly expanded fiscal room created by earlier reforms to Germany’s strict budget rules.
“Both the budget and the multi-year fiscal plan make extensive use of the expanded fiscal space available under the reformed German fiscal rules,” wrote Niklas Garnadt, economist at Goldman Sachs, in a recent note.
Deficits Climb Above Expectations
Germany’s combined federal deficit — encompassing both the main budget and off-budget spending for infrastructure and military projects — is now expected to reach 3.3% of GDP in 2025 and between 3.6% and 3.8% in the following years. Goldman Sachs analysts say these figures significantly exceed their earlier forecasts, especially for this year and next.
The surprise stems from higher-than-planned deficits in the core budget and infrastructure fund. The main budget is grappling with lower tax revenue and increased spending on defense and other current expenditures. Meanwhile, the infrastructure fund includes considerable transfers to state governments and €19 billion (around $22 billion) in federal public investment, more than half of which is earmarked for rail projects.
Modest Growth Upgrade for Germany
In light of the expanded fiscal spending, Goldman Sachs has slightly raised its economic outlook for Germany. The bank now projects GDP growth of 0.4% in 2025 — up 0.1 percentage point from previous estimates — and 1.4% growth in 2026, reflecting a 0.2 percentage point upward revision.
However, the forecast for 2027 was trimmed slightly from 2.0% to 1.8%, as the composition of spending appears more tilted toward immediate expenses rather than longer-term investments.
“Spending is more frontloaded, with less cumulative economic multiplier effect than if it were purely investment-driven,” Garnadt explained.
Challenges in Turning Budgets into Investment
Goldman Sachs highlighted structural hurdles that have historically prevented Germany from converting planned investment budgets into actual projects. Last year, only €75 billion of a €100 billion investment budget was utilized, underscoring the country’s ongoing implementation challenges.
Another factor is how federal transfers to state governments are used. Although labeled as investment in the federal accounts, these funds often lack earmarks for specific projects, allowing states to substitute them for their own planned spending.
“While labeled as investment, the agreement between the federal government and the states doesn’t compel the funds to be used for additional projects,” Garnadt noted. “Instead, states can redirect those resources toward current spending.”
Alternative Scenario: A Surge in Investment
Still, there’s potential for a more investment-heavy fiscal boost. Goldman Sachs outlined a scenario where state governments channel federal transfers into genuine additional infrastructure projects, potentially lifting public investment spending to 0.3% of GDP above current baseline forecasts.
“This scenario would produce a steeper rise in the deficit and a stronger, frontloaded fiscal impulse, driven by a higher share of public investment,” Garnadt wrote.
Growth Forecasts Outpace Peers
Even without this upside scenario, Goldman Sachs maintains that Germany’s new fiscal trajectory points to substantial economic support. The bank’s growth forecasts for 2025 and 2026 remain well above both consensus projections and the latest estimates from the Bundesbank, as Germany seeks to rebound after trailing much of Europe’s economic recovery in recent years.
